Youku Tudou: Q3 Disappointed, But Shares Surge Anyhow As China Bull Is Back

By Shuli Ren

Youku Tudou‘s (YOKU) third-quarter earnings disappointed.

Revenue came in at $140 million, only 1% above consensus. GAAP eaearnings per share was -$0.21, sharply lower than the consensus $0.06, due to an acceleration of content amortization, which incurred an additional cost of $0.14 per share.

Advertising revenue was $122 million, representing 3% quarterly growth, significantly lower than the 20-30% growth rate seen over the last five years. This is because Youku Tudou’s new shows are less popular than its peers, according to Maxim Group analyst Echo He:

we believe the decreasing revenue per customer could be a result of under-performance of user traffic and/or return-on-investment. Our previous channel checks showed that YOKU recently offered less top-rated, long-form TV dramas than its major competitors. This may have led to loss of traffic and viewing time.

Management indicated professional, user-generated and library/in-house contents were responsible for approximately 10%, 35% and 55% of total ad revenue, respectively. Given that a handful longform TV dramas account for the majority of content costs, YOKU’s investment on contents (RMB950M or $155M in the first nine months) appears to have disproportionally low returns.

Pacific Crest analysts Cheng Cheng and Evan Wilson say Youku Tudou’s shares are challenged until they make more progress on mobile monetization. Currently, only 3% of the company’s revenue comes from mobile:

We see long-term value in Youku and the online video market. However, with viewing increasingly switching to mobile, we see a soft patch for results coming until mobile monetization picks up, which we expect in the 2H14.

Mobile video views increased to over 300 million daily in Q3 from roughly 200 million in Q2. The company disclosed that around 3% of its revenue is coming from mobile video, and is expected to make limited progress in Q4. Mobile monetization as a key lever for both margin expansion and revenue growth, but we believe progress will be gradual.

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Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.